This is a question most Nigerian taxpayers can’t answer with confidence: Which parts of my income are legally tax-free?
If you’re unsure, you’re not alone.
Thousands of Nigerians overpay their taxes every year simply because they are unaware of legal exemptions. This often leads to financial losses caused by incorrect payroll configurations that mistakenly tax-exempt income.
Understanding tax-free income isn’t about finding loopholes—it’s about knowing your legal rights under Nigeria’s tax laws. With the landmark 2025 tax reforms set to take effect in January 2026, this knowledge has never been more valuable.
On June 26, 2025, the President of Nigeria signed four new tax reform bills into law, which are considered the most significant overhaul of the country’s tax structure since 1999. These reforms will fundamentally reshape taxation starting January 2026.
Your Complete Guide to Tax-Free Income in Nigeria
- Earnings Below ₦800,000: The New Freedom Threshold
From January 2026, if your annual gross income is ₦800,000 or less, you owe no personal income tax.
The new progressive tax regime provides significant relief to low-income earners, while higher-income earners will be taxed at a higher rate. This translates to roughly ₦66,667 monthly. For entry-level employees, small business owners, traders, and freelancers operating at this level, tax season becomes significantly simpler.
Current provision: Those earning only the minimum wage (₦70,000 monthly) are currently exempt.
- Retirement Gratuities: Your Lifetime of Work, Protected
This includes properly approved lump-sum payments received upon retirement and end-of-service benefits from your employer.
The rationale is clear: these payments represent your lifetime of service and should remain intact to support your retirement years. No percentages, no deductions, no exceptions.
Also exempt: National Pension Scheme contributions deducted from your salary are not subject to personal income tax.
- Compensation Payments: Protection When You Need It Most
When employment ends unexpectedly or injury occurs, Nigerian law protects you. The exemption threshold for compensation for loss of employment will increase from ₦10,000,000 to ₦50,000,000 under the new tax reforms.
This provision recognizes that such payments aren’t income—they’re compensation for loss or harm. Whether you’re laid off, restructured out, or receive settlement for workplace injury, amounts up to this threshold remain untouched by taxation.
- Foreign Income Remittances: Bringing Money Home Without Penalty
This exemption is particularly valuable for encouraging the repatriation of foreign currency. The new tax laws retain and clarify key exemptions for investment income and foreign-earned income brought into Nigeria.
What is Exempt from Nigerian Tax:
- Investment Income Repatriation (for Nigerian Residents):
- Dividends, interest, rent, or royalties earned abroad and repatriated into Nigeria through government-approved banking channels.
- This is an exemption from the general rule that Nigerian residents are taxed on their worldwide income.
- Export Proceeds:
- Dividends received from wholly export-oriented businesses are exempt.
- Profits of any Nigerian company in respect of exported goods or services are exempt, provided the proceeds are repatriated through official channels.
- Government Bonds:
- The exemption for income earned from Federal Government bonds is retained. The exemption also extends to some state bonds and other government-issued securities.
Critical Requirement: You must use government-approved banking channels (i.e., any financial institution authorized by the Central Bank of Nigeria to deal in foreign currency transactions). This documentation is essential for claiming the exemption.
Important Distinction: Residency and Tax Liability
- Nigerian Residents: Individuals legally defined as resident in Nigeria are liable to pay tax on their worldwide income (both domestic and foreign). The exemption above is a crucial relief on foreign passive income (dividends, interest, rent, royalty).
- Non-Residents: Individuals legally defined as non-resident are only liable to Nigerian tax on income derived from Nigeria. Income earned outside Nigeria by a non-resident is generally not subject to Nigerian tax, regardless of whether it is remitted.
- Agricultural Income: Encouraging Food Security
Income derived from agriculture, livestock, horticulture, or fishing benefits from significant tax incentives. Any small or medium sized company engaged in primary agricultural production shall be granted, pursuant to an application to the President, through the minister, an initial tax-free period of four years. This may be extended, subject to the satisfactory performance of such primary agricultural production, for an additional maximum period of two years.
Additionally, with these new laws, food, education, transport, and agriculture will be VAT-free, according to the Executive Chairman of FIRS.
This exemption serves Nigeria’s food security objectives while recognizing that many agricultural workers operate at subsistence levels.
- Statutory Contributions: Building Your Future Tax-Free
The following deductions are exempted from PITA: National Housing Fund Contribution, National Health Insurance Scheme, Life Assurance Premium, National Pension Scheme, Gratuities.
Certain mandatory contributions don’t just reduce your taxable income—they’re entirely exempt:
National Pension Scheme contributions – Building retirement security while reducing current tax
National Housing Fund (NHF) payments – Contributing toward homeownership, tax-free
National Health Insurance Scheme (NHIS) contributions – Health protection without tax penalties
Life insurance premiums – Securing your family’s future (for yourself or spouse)
- Investment Returns: Strategic Exemptions
The Act retains the exemption of income earned from federal government bonds and extends the exemption to state bonds, making them attractive for risk-averse investors seeking stable returns. However, the exemption does not extend to corporate bonds.
These provisions encourage participation in Nigeria’s capital market and government financing.
- Insurance Benefits: Protection Without Taxation
Life insurance payouts and legitimate claim settlements are tax-free. When you receive a life insurance benefit or successfully claim on your policy, the amount remains intact.
This makes insurance more effective as a financial protection tool, encouraging more Nigerians to secure coverage.
- Gifts Received by Individuals:
Under the new laws, non-cash gifts received by individuals are explicitly exempt from income tax, simplifying tax planning. - Capital Gains on Personal Assets (Up to ₦5m):
Gains from the sale of an owner-occupied residential house are exempt from Capital Gains Tax (CGT). Additionally, gains from the sale of personal effects or chattels (like a car or furniture) worth up to ₦5 million are also exempt. - Small Electronic Transfers & Salary Payments:
To support everyday transactions, several items are now exempt from stamp duties, including electronic money transfers below ₦10,000, salary payments, and transfers between accounts in the same bank.
12: Rent Relief (Tax Deduction)
While not non-taxable income directly, tenants can claim a major new deduction from their total income: the lower of 20% of their annual rent or ₦500,000. This requires verifiable proof of payment and effectively reduces your overall tax burden. This provision replaces the former, less targeted Consolidated Relief Allowance.
What Employers Need to Know: Strategic Compensation Design
Understanding tax exemptions transforms how you structure employee compensation. Consider this comparison:
Company A: Offers ₦5 million straight salary
Company B: Structures ₦5 million as:
- ₦4 million base salary
- ₦500,000 pension contributions
- ₦200,000 life insurance
- ₦100,000 NHIS contributions
- ₦200,000 housing fund contributions
Both employees receive ₦5 million in value, but the Company B employee pays significantly less tax. Company B also builds a reputation for sophisticated compensation design that maximizes take-home pay.
This isn’t tax avoidance—it’s intelligent structuring within legal frameworks. Smart employers use these provisions to offer more competitive compensation without increasing costs.
Maximizing Your Financial Future with Knowledge
The landmark 2026 tax reforms are not just about increasing government revenue; they are a clear directive for intelligent financial planning for every Nigerian taxpayer and business owner.
The question, “Which income is not taxable in Nigeria?” is no longer a mystery. It is the key to unlocking significant financial relief. From the new ₦800,000 threshold providing freedom for low-income earners, to the crucial protection of your retirement gratuity, and the incentives for repatriating foreign income, the law is designed to protect your hard-earned value.
For individuals, knowing these exemptions means preventing over-taxation and ensuring your long-term security plans like your pension and life insurance remain intact.
For employers, this knowledge is a competitive tool. As demonstrated, a smart compensation strategy, like that of Company B, allows you to reward your team more effectively without increasing your cost of labour.
Don’t be among the thousands who overpay. Take control of your tax destiny: understand the law, demand correct payroll configurations, and use these legal provisions to secure a more prosperous, tax-efficient future for yourself and your business.